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The slow democratisation of private equity

The challenge of getting individual investors into the asset class is spurring plenty of innovation, yet the simplest solution – listed private equity – appears to be losing its shine.

How best to allow the “man in the street” to access private equity?

It is a question that has nagged at managers of all shapes and sizes for as long as we can remember. Some firms – like Partners Group and Pantheon – are looking hard at defined contribution pension schemes and shaping products to match their liquidity and expense requirements.

Others, like Blackstone, are launching new products for retail high-net-worth investors. These now account for 17 percent, or about $62 billion, of Blackstone’s total assets under management, and chairman and chief executive Stephen Schwarzman has “great expectations” this will grow.

But while Blackstone is managing to coax more capital out of wealthy individuals, listed private equity trusts, which have been allowing investors of all hues to access private equity for many years through publicly traded shares, seem to be in reverse gear.

“Having gone through its growth in the early and mid-2000s, capital is now being taken out of the listed private equity sector,” says Tony Dalwood, the former chief executive of SVG Advisers and a veteran of the space. “This is actually quite odd, given the performance of some of these guys.”

As Alan Brierley, an analyst at Canaccord Genuity, pointed out in a note in November, “listed private equity has delivered superior returns in recent years”, but many investors remain “indifferent and consequently discounts [to net asset value] remain wide”.

Some investors, however, are anything but “indifferent”. Last year two episodes of corporate action in the space caught the attention of the wider markets. One of these was the hostile takeover of SVG by HarbourVest; the other was the seizure of control at Electra Private Equity by activist investor Edward Bramson.

These were the headline-grabbers, but look closer and it is clear that there is a wider movement afoot to unlock the inherent value in these vehicles. JPEL Private Equity, the London-listed secondaries fund with more than $500 million in assets, is preparing to effect an “orderly realisation of its portfolio” and to return capital to investors. The same is true of Dunedin Enterprise Investment Trust, a mid-market private equity investor with assets worth £100 million ($123 million; €115 million). These are dramatic, and terminal, examples. Other listed vehicles, such as Standard Life Private Equity Trust, are staying ahead of what investors want by adjusting their strategies

Perhaps some degree of consolidation in this sector is inevitable; if public shareholders are looking for the “authentic” private equity experience, they will want their capital returned to them after a decade or so. Except for the case of Better Capital – whose listed vehicles function as closed-ended private equity funds, distributing proceeds to investors as assets are sold and hence diminishing over time – most of these trusts reinvest proceeds, while paying an annual dividend. This is understandable. A manager returning all capital to investors is akin to a turkey voting for Christmas.

“The last 18 months has seen quite a dramatic change: arguably it is the beginning of the shrinking of the listed private equity space,” says Dalwood.

It is highly doubtful that these are the death throes of the sector. Its champions see investor “indifference” as something to be met with increased education and the creation of structures and strategies that cater better for public markets investors. After all, the rationale behind its existence – to provide access to private equity for retail and institutional investors who are otherwise excluded – is as valid as ever.

The February edition of Private Equity International focuses on listed private equity: read more here.